Treasurys lose appeal after Spain keeps rating

Wells Fargo sees 10-year’s yield backing rising to 2% by end of 2012

By

DeborahLevine

SAN FRANCISCO (MarketWatch) — Treasury prices fell Wednesday, pushing yields up by the most in a month, after Moody’s Investors Service left Spain’s credit rating in investment-grade territory, a move affording some measure of relief for stock and commodity traders.

But doubts remain, about Europe and the cloud over the U.S. economy, with the presidential election now less than three weeks away.

Yields on 10-year Treasury notes
US:10_YEAR
which move inversely to prices, rose 8 basis points to 1.81%, the biggest rise since Sept. 14. A basis point is one one-hundredth of a percentage point.

Spain keeps investment-grade rating

(4:20)

Spanish government bonds reach a six-month high after a much-anticipated review of Spain's finances by Moody's Investors Service left the country's credit rating at an investment-grade level.

Analysts noted that Moody’s affirmation of Spain’s rating is contingent upon the European Central Bank’s willingness to buy its debt once officials formally ask for a bailout — something that Spain has been delaying with officials saying the nation doesn’t need it since the central bank announced its offer recently. See WSJ.com: Moody's confirms Spain rating, outlook negative

“In essence this optimistic news from Moody’s is entirely dependent on the ECB buying bonds, which Moody’s says is dependent on Spain applying for a precautionary credit line without which it would lose access to private markets,” strategists at CRT Capital Group said. “If that happened, they would be downgraded as Moody’s has made clear.”

Closer to home, Treasury prices extended losses slightly after a government report said that U.S. housing starts jumped to an annualized rate of 872,000 in September, much faster a pace than had been expected. Read: Home construction surges in September.

While the big jump left some analysts suspicious, it’s likely to lead others to raise their forecasts for U.S. economic growth this quarter.

“It is starting to look like the fourth-quarter is building into something stronger than had been expected, and we believe this is likely to build a head of steam in 2013,” said Andrew Wilkinson, chief economic strategist at Miller Tabak.

Corporate bonds, election

Bond investors may also be taking the opportunity to shift into higher-yielding bonds from the corporate sector. Companies continue to meet that demand by issuing debt, which surpassed the $1 trillion mark for the year on Tuesday, according to Informa Global Markets. That’s the earliest date in the year to surpass that milestone, with the exception of 2009 when lots of government-backed bank debt inflated issuance — so that year’s numbers often get an asterisk.

The firm expects 10-year Treasury yields to rise to 2% by the end of this year and then to 2.50% in 2013.

Thirty-year yields will increase to 3% this year and to 3.75% in the next year, Rehling said.

And after Tuesday evening’s presidential debate, those market players who want to be optimistic may just wait for the election to pass and resolve some of the uncertainty about economic policy, the U.S. tax system and regulations, especially in certain industries. Read how the election outcome will affect various bonds.

In essence, it doesn’t really matter who won the second debate between President Barack Obama and GOP challenger Mitt Romney. The idea is that the U.S. economy is strong enough and dynamic enough to handle whatever set of rules it can operate under; it just needs to know the rules.

“Once we shake off these uncertainties in the coming months, we’ll get a much better look at how well this country has done in the past few years to repair private-sector balance sheets and to restore the foundations for growth,” said Bill O’Donnell, bond strategist at RBS Securities.

Once the Nov. 6 election passes, investors “will conclude that the risk-adjusted returns in Treasurys are simply too low for a country in the ascendant—the political process be damned,” he said.

Still, in recent days, plenty of investors and analysts remain pessimistic and are actually increasingly worried about whether Congress and the White House will be able to compromise on tax and spending measures—collectively known as the fiscal cliff—after such an acrimonious election campaign. Read: Fiscal worries limit Treasury loss as data improves.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.